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Canada considers expanding support for CCUS

03 February 2022 Kevin Adler

The contribution of carbon capture, usage, and storage (CCUS) to reducing Canada's emissions inventory could be boosted this year as the government weighs whether to offer an investment tax credit to spur development of CCUS projects.

A tax credit would be especially welcome for the oil and natural gas industry that contributes nearly 10% of the country's annual gross domestic product, but also 26% of its yearly GHG emissions.

"Accelerating carbon capture projects will be essential to reaching the government's goal of increasing Canada's annual carbon capture from four megatons [million metric tons] to at least 15 megatons. It is essential we enable the full utilization of the carbon to ensure maximum benefits of this program," Canadian Association of Petroleum Producers (CAPP) President and CEO Tim McMillan said.

"Many of our key exports, steel, cement, fossil fuels, petrochemical production and some forms of mining, and areas where we want a future export advantage, such as hydrogen production, renewable natural gas, among others, will depend on CCUS technology as part of their decarbonization strategy," wrote the Canadian Chamber of Commerce in a letter to the Finance Ministry last year.

But opposition is coming from groups that say the technology has not met expectations and fear it could be used to extend fossil fuel development.

Investment tax credit

The national government suggested an investment tax credit for CCUS last year during the initial consultation on Budget 2021, the nation's annual spending plan. The Department of Finance held a public comment period from June through 7 December, but has not announced a timetable for issuing a draft tax plan. A department spokesperson told Net-Zero Business Daily on 2 February that it is reviewing stakeholder input.

The tax credits would be in addition to C$319 million (US$251 million) that is now in the hands of federal agency Natural Resources Canada for CCUS research, development, and demonstrations, spread over the next seven years.

CAPP has recommended that the tax credit should cover 75% of a project's cost, in order to incentivize private investment to cover the rest. In contrast to the announced intent of the Finance Ministry, CAPP said that enhanced oil recovery projects should be eligible for the credit.

"The Canadian oil and natural gas industry is the best positioned sector in Canada to drive energy innovation, including CCUS," Ben Brunnen, vice president of oil sands, fiscal and economic policy for CAPP, told Net-Zero Business Daily by email on 3 February. "We believe that excluding Enhanced Oil Recovery from the federal program will create substantial challenges to the government in reaching this goal and that uncertainty surrounding the cost of carbon globally and within Canada increases project risks. In order to be competitive, the level of government support needs to be comparable to commitments made in other jurisdictions, such as the US and Norway."

The Canadian Chamber of Commerce provided its comment letter to Net-Zero Business Daily. It wrote to the Finance Ministry in September to propose the credit at 70% of a project's cost and to be paid for 16 years from the startup of a project. It said that enhanced oil recovery projects should be eligible. The Chamber emphasized that all parts of the CCUS value chain, from carbon removal to pipelines to injection services, should be covered.

Also, the Chamber said the credits should be fully refundable—that is, paid to the developers based on carbon removed, not against revenue or profits. This is key "because most of these projects generate little to no revenue, especially depending where they are on the CCUS value chain," it said.

Skepticism

Nonetheless, CCUS has met with skepticism from Canadian climate scientists.

"Despite decades of research, CCUS is neither economically sound nor proven at scale, with a terrible track record and limited potential to deliver significant, cost-effective emissions reductions," more than 400 scientists wrote in an open letter on 19 January to Finance Minister Chrystia Freeland.

"Carbon capture for the oil and gas sector is not a climate solution. At best, it prevents some carbon dioxide from polluting facilities from reaching the atmosphere, but it is not a negative emissions technology," the scientists stated.

In their letter, they took aim at the Boundary Dam CCUS project, which began operation in 2014. It was the world's first carbon capture facility fully integrated with a coal-fired power plant. Owner SaskPower says Boundary Dam has captured more than 4 million mt since startup and can be operated at up to 1 million/mt per year.

However, the scientists observed that SaskPower initially promised a capture rate of 90%. "It never reached that rate, so SaskPower eventually lowered its expectations to 65%—a target the facility still regularly fails to meet," they said.

Shell Catalysts & Technologies, which provided the CCS technology for Boundary Dam, has been operating its own CCUS project in Canada since 2015—the Quest Project that is the world's first application of the technology at an oil sands processing plant. Last year, Shell reported that the facility has removed more than 5 million mt of CO2 in since startup, supporting the Athabasca Oil Sands project.

However, that claim was marked with a giant asterisk this January by environmental group Global Witness, which calculated that the facility has emitted 7.5 million mt of CO2 during the same period. Since full startup, the facility has captured about 48% of emissions from the entire, Global Witness said, so it's nowhere near the performance promised by CCUS promoters.

Shell said in a statement that the plant near Edmonton was designed to prove its technology, and is operating only to capture the emissions from the hydrogen unit used in oil sands upgrading at the site. It's capturing 90% of those emissions, according to Shell, and is operating at designed efficiency.

The difficulty of achieving those 90%-plus capture rates across the oil and gas upstream appears to have caught the attention of Minister of Natural Resources Jonathan Wilkinson. "I would say to you, at this stage in Canada, CCS technology has not reached the level of commercial maturity nor cost maturity … to be a solution before 2030," Wilkinson said in a statement on 21 January.

Need to reduce carbon emissions

Finding a way to reduce emissions from the oil and gas sector is key for the world's fourth-largest crude producer's attempts to maintain the health of its biggest source of export revenue.

Crude exports in 2019 were valued at C$88 billion (approximately US$69 billion), according to the Canadian Energy Regulator. They fell about one-third in 2020, due to the COVID-19 pandemic, before rebounding in the first half of 2021 (final figures not available). In 2019, crude oil accounted for more than 15% of Canada's gross export revenue.

But with the industry tied with transportation as the largest GHG contributors in Canada at about 200 million mt/year, pressure is building to radically reduce their impact. (For transport, the biggest solution is a ban on the sale of new light-duty internal combustion engines starting in 2035.)

Canada updated its nationally determined contribution (NDC) under the Paris Climate Agreement to a 40-45% cut in emissions below 2005 levels by 2030.

National emissions would have to fall to 401-438 million mt/year by 2030 to meet the NDC, with the oil and gas industry contributing a commensurate share. Prime Minister Justin Trudeau said he will introduce measures to cut methane emissions from oil and gas production, transportation, and refining by 75% relative to 2012 levels by 2030.

The industry has made significant strides. A report by IHS Markit, released on 1 February, reported that the carbon intensity of Canadian oil sands production fell to 69 kg per barrel (kgCO2e/bbl) in 2020. Since IHS Markit began tracking kgCO2e/bbl in 2009, the GHG intensity of oil sands production has declined by 20%.

Those types of improvements will continue, but it's not enough, said Andy Mah, former CEO of oil producer Advantage Energy. "Let's not kid ourselves, [getting to net zero] is a gargantuan effort. There are cost components, unprecedented collaboration … will have to come from all fronts," Mah said in a talk with a university student group on 13 January. "Carbon capture and sequestration is really going to be the key to impacting many of the industries, especially the power and energy industries."

While still at Advantage Energy, Mah partnered with two technology firms to create Entropy Inc. Entropy is developing small, modular CCS services for energy producers and industrial users that it says can capture 90% of CO2. Entropy is pointing towards the first commercial application of its technology at Advantage's Glacier Gas Plant in Alberta in 2025, Mah said.

Cost of CCUS

Cost is nearly as much a concern for CCUS opponents as the current limits of the technology. Shell said the Quest facility cost C$1 billion, of which C$865 million has been covered by grants and tax breaks from the federal government and the province of Alberta, where it's located.

Cost estimates for a new CCS plant are slippery because it's an emerging technology with fewer than 20 world-scale facilities operating today, and those operations vary greatly.

The International Energy Agency (IEA) has observed that factors such as the type of activity from which carbon is being captured, the percentage of carbon facilities are designed to capture, and overall capacity can boost costs by a factor of two, three, or more. But the IEA said in a report in 2020 that the cost per metric ton of CO2 captured had fallen about 25% from 2014 to 2019 for a comparable facility, and that reductions of 30-50% could be expected by 2050.

Given the high cost of the technology, the climate scientists and environmental groups say that if Canada is going to support any CCUS, it should only be in those industry sectors for which alternatives to using fossil fuels are least available, such as steel mills and fertilizer plants.

"If there is a future for CCS in a climate-safe world, it will be through applications that capture concentrated emissions from industrial processes, where alternatives are not available or impractical. That certainly does not apply to fossil fuel industries …" Environmental Defence said in a report in November on the oil industry and climate change.

One such high-impact project was announced in January in Edmonton, Canada, by Lehigh Cement and pipeline company Enbridge. Aiming to capture approximately 780,000 mt/year of CO2, the project would be the largest for any North American cement maker. The carbon would be transported via an Enbridge pipeline to a storage facility it will soon apply to develop in the Wabamun area, and Enbridge announced on 3 February that First Nation Capital Investment Partnership, a tribal nations' investment group, has joined the venture as an equity owner.

So far, the Wabamun storage hub has two customers, Lehigh Cement, and utility Capital Power, which seeks to sequester about 3 million mt/year of CO2.

"Subject to the award of carbon sequestration rights and regulatory approvals, the project could be in service as early as 2025," Enbridge said.

Canada's environmental goals

All the discussion about CCUS comes in the context of a country that is in the awkward position of being a major producer of fossil fuels and wanting to be a leader in the climate transition.

"The development of policies and regulations to implement Canada's updated climate commitments in the hydrocarbon sector is likely to be a key near-term priority of the minority Liberal government," noted IHS Senior Research Analyst Aliaksandr Chyzh in an update on Canada's energy and environmental programs.

Canada already has numerous emissions reduction programs. It's among the few countries in the world with a mandatory carbon pricing program, which was upheld by its national court in March 2021. Starting at C$20/mt CO2e in 2019, the carbon tax has increased by C$10 annually to C$50/mt this year.

The NDC mentions raising the carbon tax by 15% annually through 2030, at which point it would be C$170/mt, though that has not yet been formally proposed as a new law.

The Canadian Chamber of Commerce said in its letter to the Finance Ministry that a high carbon fee eventually will make some CCUS projects financially competitive. But it warned that if the country wants to see projects started before the end of this decade, the investment tax credit is necessary.

Overall, the country's climate ambitions have won some acclaim. "Canada has shown impressive leadership, both at home and abroad, on clean and equitable energy transitions," said IEA Executive Director Fatih Birol in January when the agency released a report on Canada's energy future. "Equally important, Canada's efforts to reduce emissions—of both carbon dioxide and methane—from its oil and gas production can help ensure its continued place as a reliable supplier of energy to the world."

But critics point out that many of Canada's plans to reduce emissions are just that—plans.

Climate Action Tracker, a nongovernmental organization, estimated that Canada's policies that are actually in place would reduce emissions modestly from 2020 to 2030, down from 780 million mt to 688 million mt—or far from the goal in its NDC in the low 400s.

That gap exemplifies the quandary Canada faces today. It needs the oil and gas industry to be healthy, in order to fund the carbon reductions that the industry must make, but those operations are contributing about a quarter of its emissions inventory. CAPP stated in 2021 that just for oil sands production, getting to net-zero emissions by 2050 will require investment of C$75 billion in process improvements, electrification, and CCUS.

The Royal Bank of Canada released a report in October that put the cost to reach net-zero nationwide at C$2 trillion, approximately equal to annual GDP. For the oil and gas industry, it puts the investment at about C$160 billion over 30 years, including what it calls "extensive" carbon abatement.

"Canada's opportunity to lead in this global transformation is a matter of years, not decades away," said John Stackhouse, the bank's senior vice president, when the report was released. "But if we do not move with urgency, Canada's window for gaining access to new markets, and attracting talent and capital in a modern global economy will quickly close."

Posted 03 February 2022 by Kevin Adler, Chief Editor

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